The True Costs of Health Reform

UPDATE: CBO has modified its cost estimate for the House bill to save $138 billion over ten years, instead of $109 billion. This change is due to the fact that the CLASS Act (described below) would end up raising $30 billion more than originally projected in the first decade), ironically because of broader than originally believed coverage.

Yesterday, the House passed legislation permanently updating physician payments on a deficit-financed basis (against our urging). Although passed separately from their health care bill, it is worth looking comprehensively at the cost of health care reform, as passed by the House of Representatives so far.

As we show in our newly updated health care comparison chart, the "Affordable Health Care for America Act," which passed the House recently, it would reduce the ten year deficit by around $109 $138 billion.

That number, though, includes $72 $102 billion worth of savings from the CLASS Act* -- a long-term care insurance plan which raises early revenues due to a five year vesting period, but spends all of that money down in the out years. If the effects of the CLASS Act are excluded, as most experts think they should be, the bill will reduce the deficit by $37 billion over ten years. House leaders deserve credit for rightfully describing the bill this way (unlike the Senate leadership, which includes the savings from the CLASS Act in their deficit reduction claims).

But wait, there is more. The House, yesterday, passed a bill which would eliminate the so-called "sustainable growth rate" (SGR) for Medicare physician payments and replace it with a new formula. Under the existing formula, physicians are scheduled to receive a 21 percent pay cut next year, and further cuts thereafter. On its own, reforming the SGR would cost $210 billion over the next decade. CBO has estimated that, if enacted with the comprehensive reform bill, fixing the SGR would cost closer to $198 billion.

$109 $138 billion - $72 $102 billion - $198 billion = -$161 billion (after rounding). So instead of reducing the deficit by $109 $138 billion, it will be as if the House is increasing the deficit by $161 billion.

And the long-term picture looks even worse. Under the official deficit measure of the Affordable Health Care for America Act, the CBO estimates a $9 $12 billion deficit reduction in 2019; and because savings will grow slightly faster than costs, deficit reduction between 0% and 0.25% of GDP in the second decade. Using our measure, the 2019 deficit would be increased by $30 billion. And the costs of the SGR fix would also grow quickly, wiping out future savings. As you can see in the graph above, the deficit impact between 2018 and 2019 is roughly flat (and negative). CBO estimates that if the SGR fix were combined with the other bill, deficits would increase by between 0% and .25% in the second decade.

*A couple billion of that savings would come from lower Medicaid costs. This is a fair and legitimate offset, and should technically be included in the final deficit number. Due to technical limitations, however, we have had to group these savings with the rest of the CLASS Act.

So what about the Senate? Like the House, their bill -- which technically would reduce the deficit by $130 billion -- includes offsets from the CLASS Act (which they count!). Once that is excluded, the actual deficit reduction would be more like $57 billion.

On the SGR fix, the Senate hasn't passed anything yet. In fact, they rejected a previous deficit-financed fix, and their reform legislation includes a temporary ($11 billion) patch of the SGR, which they pay for.

But if the Senate did pass a permanent fix the SGR similar to the House's, it would cost around $185 billion. That would mean that if the Senate deficit-finances the remainder of an SGR fix, and they pass health reform legislation in its current form, they'd be adding around $130 billion to the deficit, rather than reducing the deficit by that amount. It's important to note, though, that the Senate has not passed an SGR fix on a deficit-financed basis.

In a similar type of analysis, Senate Budget Committee Republicans have attempted to estimate the "true cost of the Senate health care bill." Their concern is chiefly in spending rather than deficit impact, and focuses strongly on timing aspects -- aiming to measure the bill's costs once it is fully phased in.

They find that if measuring all the costs of the bill for the first ten years after the major provisions begin (2014 through 2023), it would cost around $2.5 trillion. This is significantly higher than the $848 billion normally advertised as the cost of the coverage between 2010 and 2019, the roughly $940 billion we calculate as the gross cost, or even the $1.24 trillion they estimate for 2010 to 2019. It is important to note that, in calculating gross costs, this analysis pulls apart a number of line items which are generally netted out -- for example premiums and spending for the "public plan" are counted separately.

In that same period, they calculate offsets of around $2.7 trillion. See their estimates here: